SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
(Mark One)
(x) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2001
--------------
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period from to
----- -----
Commission file number 000-19579
INTERACTIVE NETWORK, INC.
(Exact name of registrant as specified in its charter)
California 94-3025019
(State of incorporation) (I.R.S. employer identification number)
180 Second Street, Suite B
Los Altos, California 94022
(Address of principal executive offices and zip code)
(650) 947-3345
(Registrant's telephone number, including area code)
with a copy to Robert S. Townsend
Morrison & Foerster, LLP
425 Market Street
San Francisco, CA 94105
(415) 268-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares outstanding as of October 15, 2001
- ----- -----------------------------------------
Common Stock 43,019,277
INTERACTIVE NETWORK, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS.....................................1
CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 2001 (Unaudited) AND DECEMBER 31, 2000........1
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000.....2
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2001
AND 2000...............................................3
NOTES TO FINANCIAL STATEMENTS (Unaudited)................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........4
SIGNATURES..........................................................10
i
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A to the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2001 is being filed to amend Part I, Item 1 and
Item 2, to read as follows. No other changes are being made to the Form 10-Q.
PART I.
FINANCIAL INFORMATION
ii
ITEM 1. FINANCIAL STATEMENTS.
INTERACTIVE NETWORK, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of As of
March 31, 2001 December 31, 2000
-------------- -----------------
(Unaudited)
Assets
Current assets:
Restricted cash $ 5,576,421 $ 5,609,735
Cash 413,979 685,168
Royalty fee receivable 67,500 250,000
Prepaid expenses and other current assets 53,027 47,218
-------------- --------------
Total current assets 6,110,927 6,592,121
Deposits and other assets 3,430 3,220
-------------- --------------
Total assets $ 6,114,357 $ 6,595,341
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 435,861 $ 443,952
Promissory note - current 171,130 85,565
Deferred legal fees 957,775 957,775
-------------- --------------
Total current liabilities 1,564,766 1,487,292
Liabilities subject to compromise 5,499,998 5,503,263
Promissory note - noncurrent 513,390 598,955
Shareholders' deficit:
Preferred stock, no par value, 10,000,000 shares
authorized; no shares issued and outstanding as of
March 31, 2001 and December 31, 2000 - -
Common stock, no par value, 150,000,000 shares
authorized; 43,019,277 shares issued and
outstanding as of both March 31, 2001 and December 31, 2000 145,874,986 145,874,986
Accumulated deficit (147,338,783) (146,869,155)
-------------- --------------
Total shareholders' equity (deficit) (1,463,797) (994,169)
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 6,114,357 $ 6,595,341
============== ==============
See accompanying notes to consolidated financial statements.
1
INTERACTIVE NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2001 2000
---------- ----------
Royalty fees $ 67,500 $ -
---------- ----------
General and administrative expenses:
Salaries 77,919 65,641
Employer payroll taxes 6,630 5,592
Contract labor 25,507 25,670
Rent 9,000 2,066
D&O insurance 15,900 -
Other administrative costs 13,490 33,671
Legal fees 48,109 44,086
Accounting fees 21,096 37,318
Advisory fees - 390,000
Legal - NTN litigation 2,388 4,769
Shareholder relations - proxy 1,400 3,883
---------- ----------
General and administrative expenses 221,439 612,696
---------- ----------
Loss from operations (153,939) (612,696)
Other (income) and expense
Interest income (73,076) (2,526)
Interest expense 137,965 7,872
Net loss from investment in affiliate
accounted for by the equity method 304,859 5,491
Reserve for impairment of investment (54,859) -
Litigation settlement - (219,215)
---------- ----------
Other (income) and expense, net 314,889 (208,378)
---------- ----------
Income (loss) before reorganization expenses (468,828) (404,318)
Reorganization expenses - 106,272
---------- ----------
Net income (loss) before federal & state taxes (468,828) (510,590)
Federal & state taxes 800 800
Net income (loss) $(469,628) $(511,390)
========== ==========
See accompanying notes to consolidated financial statements.
2
INTERACTIVE NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $ (469,628) $ (511,390)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Reorganization expenses - 105,521
Loss from investment in affiliate 304,859 5,491
Allowance for investment in affiliate (54,859) -
Changes in assets and liabilities:
Royalty fee receivable 182,500 -
Prepaid expenses and other assets (10,000) -
Accounts payable (8,091) (40,970)
Other accrued liabilities 716 (603,509)
------------ ------------
Cash provided by (used in) operating activities: (54,503) (1,044,857)
Cash flows from investing activities:
Investment in TWIN Entertainment (250,000) (500,000)
------------ ------------
Cash provided by (used in) financing activities: (250,000) (500,000)
------------ ------------
Cash flows from financing activities:
Sale of common stock - -
Exercise of options - 490,997
------------ ------------
Cash provided by (used in) financing activities: - 490,997
------------ ------------
Net decrease in cash (304,503) (1,053,860)
Cash at beginning of period 6,294,903 7,576,158
------------ ------------
End of period $ 5,990,400 $ 6,522,298
============ ============
See accompanying notes to consolidated financial statements.
3
INTERACTIVE NETWORK, INC.
Notes to Unaudited Consolidated Financial Statements
March 31, 2001
The consolidated financial information of Interactive Network, Inc. (the
"Company") furnished herein reflects all adjustments, consisting only of normal
recurring adjustments which in the opinion of management are necessary to
present fairly the financial position of the Company as of March 31, 2001 and
the results of its operations and cash flows for the periods presented. This
Quarterly Report on Form 10-Q should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K Report for the
year ended December 31, 2000 filed with the Securities and Exchange Commission
("SEC") on April 16, 2001. The results of operations for the three-month period
ended March 31, 2001 are not necessarily indicative of the results for any
subsequent quarter or for the entire year ending December 31, 2001.
Current liabilities consist of accounts payable, and legal fees and expenses
incurred in connection with the Company's Chapter 11 bankruptcy proceedings and
general corporate work. Payment of Morrison & Foerster's pre-confirmation fees,
which is subject to Bankruptcy Court approval, was deferred by agreement until
April 22, 2000, when payment was due in full without interest. As the Company
lacked funds to pay Morrison & Foerster's fees at that time, Morrison & Foerster
did not apply to the Bankruptcy Court for approval of its fees. However, it
expects to do so soon. The amount of preconfirmation fees sought by Morrison &
Foerster is subject to reduction by the Bankruptcy Court and the payment of the
preconfirmation fees is subject to an agreement between Morrison & Foerster and
the Company.
INVESTMENT IN AFFILIATE. The Company owns 50% of the outstanding capital stock
of TWIN Entertainment, Inc. ("TWIN Entertainment"), a corporate joint venture
between the Company and Two Way TV Limited ("Two Way TV"). TWIN Entertainment's
offices are located at 4929 Wilshire Boulevard - Suite 930, Los Angeles, CA
90010. TWIN Entertainment operates in the United States and Canada using
technology licensed by the Company and Two Way TV. The Company made additional
investments in TWIN Entertainment in the form of loans of $750,000 in September
2000, $250,000 in December 2000 and $250,000 in February 2001, and Two Way TV
made similar investments, leaving the relative ownership interests in TWIN
Entertainment unchanged. Each party reserves the right to convert such amounts
to equity in TWIN Entertainment in the future under terms to be determined and
agreed upon at a later date by the parties.
Condensed financial data of TWIN Entertainment for the three month period ended
March 31, 2001 follows:
FROM INCEPTION AT
THREE MONTHS ENDED JANUARY 10, 2001 THROUGH
MARCH 31, 2001 MARCH 31, 2001
-------------- --------------
SUMMARY OF OPERATIONS
Revenues $ 0 $ 0
Costs and expenses 872,112 3,058,561
Income taxes 0 800
Net loss (872,112) (3,059,361)
Interactive Network's equity in net income (436,056) (1,529,680)
BALANCE SHEET DATA ASSETS
Current assets 413.696 60,247
Non-current assets 438,092 351,115
------------ ------------
Total assets $ 851,788 $ 411,362
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities 369,974
Long-term debt 2,500,000
Other non-current liabilities
Shareholders' deficit (2,018,186)
------------
Total liabilities and shareholders'
deficit $ 851,788
4
The Company periodically evaluates the recoverability of its equity investments,
in accordance with APB No. 18, "The Equity Method of Accounting for Investments
in Common Stock," and if circumstances arise where a loss in value is considered
to be other than temporary, the Company will record a write-down of investment
cost. The Company's recoverability analysis is based on the projected
undiscounted cash flows of the operating ventures, which is the lowest level of
cash flow information available. The Company's share of the operating loss from
its joint venture investment in TWIN Entertainment was approximately $305,000
for the quarter ended March 31, 2001 accounted for by the equity method. The
Company also adjusted its allowance against its investment and outstanding loans
in the amount of $54,859 to write the investment, including loans, down to zero
at March 31, 2001, as no assurance can be made that the joint venture will be
profitable in the future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with Management's
Discussion and Analysis of Financial Conditions and Results of Operations
contained in the Company's Annual Report for the year ended December 31, 2000,
filed with the SEC on April 16, 2001. The discussion of the Company's current
business and future expectations under this item contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in the subsection entitled "Forward Looking
Statements" below and in the section "Factors Affecting Future Operating
Results" from Item 1 of the Company's 10-K for the fiscal year ended December
31, 2000, incorporated herein by reference.
OVERVIEW
Interactive Network was originally founded to provide interactive television
services, which we began providing in 1991. We incurred significant expenses in
developing, testing and marketing our services, and were forced to curtail our
operations by August 1995, due to lack of ongoing financing. While in operation,
we acquired key strategic investors such as TCI Cable (now a part of AT&T), NBC,
Gannett, Motorola, Sprint, and AC Nielson.
Today, we own certain intellectual property assets related to the interactive
television market and other interactive technology. Our prior strategic
investors remain as our stockholders and our management is confident in its
strategy to deliver stockholder value by marketing our intellectual property and
by working to enhance and develop our patent portfolio. We continue to
concentrate on exploiting our patent portfolio in a cost-effective way through
licenses, joint ventures, strategic alliances, or other methods that do not
involve large overhead demands. In the event that we acquire sole ownership of
TWIN Entertainment, as discussed below, we will move from exploiting our patent
portfolio through broad licensing, joint ventures and strategic alliances and
will instead engage in restrictive licensing of our intellectual property and
focus on developing and licensing products and services that utilize our patents
and Two Way TV's technology.
We have an advisory panel of consultants and have re-employed our former Chief
Scientist, Dr. Robert Brown, to provide the technical and management expertise
to assist in the fulfillment of our goals. Further, our management is planning
to hire additional personnel to meet our anticipated future needs. Our
bankruptcy reorganization plan was approved by the Bankruptcy Court in 1999 and
we continue to expend resources in litigating disputed claims. In addition, we
expend significant resources in the maintenance and enforcement of our
intellectual property rights. Our management believes that our intellectual
property assets put our company in a position to be a part of the interactive
content and interactive services businesses currently being developed.
On January 31, 2000, we consummated the formation of a joint venture company,
TWIN Entertainment, which is co-owned and co-managed by us and Two Way TV under
the terms of a Joint Venture and Stock Purchase Agreement dated as of December
6, 1999. Each of us and Two Way TV have subsequently financed TWIN's operations
equally. TWIN Entertainment currently expects to develop, market and supply
digital (as well as analog) interactive and related services, products and
technology in the United States and Canada. We have licensed TWIN Entertainment
the non-exclusive use of our patents and other intellectual property for the
United States and Canada. Two Way TV also licensed to TWIN Entertainment certain
intellectual property rights and technology, including then-existing and future
content, software, know-how and other technological materials and information,
on a non-exclusive basis.
5
Additionally, as part of the agreements with Two Way TV to create TWIN
Entertainment, we settled all outstanding claims with Two Way TV and entered
into a separate worldwide license agreement that exclusively licenses our
intellectual property in countries other than the United States and Canada to
Two Way TV in exchange for a royalty payment of a certain percentage of Two Way
TV's world wide sales. Under the terms of the agreement, Two Way TV will pay us
a royalty of 3% of worldwide Gross Profits (as defined in the Termination and
License Agreement dated as of January 31, 2000, which was filed with the SEC on
February 11, 2000 as Exhibit 2.5 to a Report on Form 8-K and which is
incorporated herein by reference), with a minimum annual royalty of no less than
$250,000 by January 31, 2001, with the minimum royalty payment increasing by at
least eight percent (8%) each year thereafter. In March 2001, Two Way TV paid us
a royalty of $250,000 for the year ending December 31, 2000. Although we have
not received the royalty payment for the year ending December 31, 2001, the
Company has recognized the corresponding prorated minimum revenue due for the
three months ended March 31, 2001.
During the year ended December 31, 2000, we made additional investments in TWIN
Entertainment in the form of loans, and Two Way TV made similar loans to TWIN
Entertainment. Each of us and Two Way reserves the right to convert the loan
amounts to equity in TWIN Entertainment in the future under terms to be
determined and agreed upon at a later date by the parties. We made a further
loan of $250,000 on similar terms as described above in February 2001 to TWIN
Entertainment, and Two Way TV made a similar loan to TWIN Entertainment.
We understand that TWIN Entertainment's management is in discussions with a
number of companies to obtain carriage and content agreements to deliver and
create interactive entertainment under the licensing it has received from the
Company and Two Way TV. Although TWIN Entertainment has not recognized revenue
and no assurance can be given that it will be profitable in the future, we
believe that TWIN Entertainment will use our intellectual property and Two Way
TV's technology to become an active participant in the interactive television
and broadband market in the U.S. and Canada.
In December 2000, we announced that we were negotiating the terms of a
transaction with Two Way TV under which we would acquire 100% ownership of TWIN
Entertainment, which is still in progress. Under the terms of the transaction as
currently proposed, we anticipate that Two Way TV will exchange its interest in
TWIN Entertainment for a substantial stake in Interactive Network, making Two
Way TV our largest shareholder, and TWIN Entertainment will merge with us,
forming a single company. Final terms of the transaction have not been agreed
upon, however, and the completion of any transaction as currently reported is
subject to many conditions, including the negotiation and execution of
definitive legal agreements, due diligence by us and Two Way TV, approval by
both our board and Two Way TV's board, approval by TWIN Entertainment's
shareholders, approval by our shareholders and any required regulatory review.
Thus, while we believe that the transaction will be completed, it remains
possible that the acquisition will not take place or that the terms of any
actual transaction as consummated will be significantly different from those
currently proposed.
LIQUIDITY AND CAPITAL RESOURCES
We consummated a settlement agreement with our secured senior noteholders and
have paid all undisputed claims under our confirmed plan of reorganization. A
substantial portion of the proceeds received from the noteholders was allocated
to pay creditors and a large portion of those funds were set aside in a reserve
account for the payment of creditors whose claims we are continuing to dispute.
As of March 31, 2001, the balance of these reserved funds was $5.6 million. As
of March 31, 2001, the total of all allowed and disputed prepetition claims
either allowed or disputed totaled approximately $5.6 million. The amount of
funds available to us after resolution of contested claims with creditors will
depend on the extent to which we are successful in substantially reducing,
defeating or deferring payment of the claims we are contesting. In the event we
are not successful in defeating, substantially reducing or deferring payment of
these claims by creditors, our working capital requirements would need to be
satisfied in part by external sources of financing to the extent revenues from
exploitation of our patent portfolio are not sufficient. Certain investors have
agreed to allow the Company to use funds committed in our recent financing (see
below) by them to supplement our bankruptcy reserve account on a monthly basis
to retain the 100% coverage as interest accrues on certain of those claims, as
applicable. By this arrangement, we have obtained an order of the Bankruptcy
6
Court staying the enforcement of the National Datacast, Inc., claim. The
Bankruptcy Court entered the stay order on November 13, 2000. We funded the
reserve account within the deadline set by the stay order, and has continued to
keep it funded at 100% through March 31, 2001. The only remaining claims secured
by the reserve account are those of National Datacast (which is on appeal as
discussed below), Fish & Richardson (which is subject to a claim objection
proceeding as discussed below) and Equitable (which claim is being paid on a
monthly basis pursuant to a settlement with Equitable, with four equal
installments of about $35,000 remaining). These unresolved claims were secured
by a lien on the revenue arising from our intellectual property, but in
accordance with our confirmed plan of reorganization, the lien was released
because the reserve account is funded for 100% of remaining creditor claims.
Our current business plan continues to be one of exploiting our patent portfolio
through negotiating favorable licensing with those companies actively involved
in, or planning to enter into, the area of interactive advertising and/or the
delivery, or production of interactive entertainment where we believe a license
from the Company is required for them to avoid infringement upon one or more of
our patents. Where we can not make favorable agreements with companies whom we
believe are infringing upon our intellectual property, it is management's
intention to litigate that infringement to enforce and to protect our rights.
Additionally, we will continue to support TWIN Entertainment, which we believe
will be successful in the future by contracting with content providers to create
interactive programming and with cable and satellite operators to deliver
interactive content to their subscribers. In the event of the successful
completion of the acquisition of and merger with TWIN Entertainment, we will
move from exploiting our patent portfolio solely through licenses, joint
ventures and strategic alliances and will instead engage in restrictive
licensing of our intellectual property and also develop and license products and
services that utilize our patents and Two Way TV's technology.
Management intends to continue its patent development program and to continue to
seek out mutually advantageous agreements with other related companies to form
partnerships and alliances which will enhance the value of, and assist in
exploiting, our technology. We continue to pursue our claims for patent
infringement against Networks North, Inc. (formerly NTN Communications Canada,
Inc.) in Canada and intend to litigate these claims to full resolution. We have
incurred expenses of approximately $103,000 in connection with the pursuit of
this claim. As is customary in Canada, we were also required by the Court to
post a bond for $27,160 to cover the defendant's legal costs in the case of an
unfavorable decision against us. We currently expect to incur aggregate
additional expenses in excess of $100,000 in connection with the pursuit of this
claim.
We currently expect our need for working capital for the remainder of fiscal
year 2001 to consist largely of general and administrative expenses, repayment
of debt due in 2001, professional fees and patent development and marketing
expenses to establish a groundwork for generating revenues from our intellectual
property assets. Between September 13, 2000, and December 31, 2000, we raised
$3.1 million through the sale of 2,541,672 units to private investors pursuant
to a Stock Purchase and Investment Agreement dated September 13, 2000. Each unit
consists of one share of our common stock and a five-year warrant to purchase
one share of our common stock at an exercise price of $1.90 per share. We intend
to use the remainder of the proceeds to fund our operations through the second
quarter of 2001. Under the agreement, these investors retain substantial control
over the use of proceeds from their investment. This description is a general
summary only and does not describe all the terms of the investment, which is
governed by the agreement. A copy of the agreement has been filed as Exhibit
10.19 to the Quarterly Report on Form 10-Q filed with the SEC on November 14,
2000, and is incorporated herein by reference.
In addition, $250,000 was invested in TWIN Entertainment in February 2001 and,
if the acquisition of and merger with TWIN Entertainment is successful, we will
incur additional general costs related to the merger. This $250,000 investment
in TWIN Entertainment was paid out of the proceeds from the sale of the units
discussed above and is in the form of a loan in which each of us and Two Way TV
reserves the right to convert to equity in TWIN Entertainment in the future
under terms to be determined and agreed upon at a later date by the parties.
We incurred legal expenses reflected on the balance sheets of $957,775 prior to
confirmation of our bankruptcy reorganization plan on April 22, 1999, which
became payable on April 22, 2000, subject to Bankruptcy Court approval, which
our counsel intends to seek. We also incurred post-confirmation legal expenses,
principally in preparing and litigating objections to claims filed in the
bankruptcy proceeding and for general corporate matters, on which a balance of
$684,520 remains unpaid as of March 31, 2001. We have entered into an agreement
with our counsel for payment of these expenses on the following terms: the
preconfirmation legal fees currently reflected on the balance sheets as $957,775
is due and payable on September 30, 2001, with interest accruing from October
7
15, 2000 at 1% per annum over Bank of America's prime rate and the $684,520 is
payable in equal monthly installments over two years, commencing October 15,
2001, with interest accruing from October 15, 2000 at 1% per annum over Bank of
America's prime rate. We also issued to our counsel a warrant exercisable in
whole or in part from time to time for 5 years, to purchase sufficient shares of
our common stock to enable the warrant holder, by tender of the warrant in
satisfaction of such indebtedness (and any indebtedness incurred in appealing
Bankruptcy Court awards, which totals approximately $92,000 in fees and
disbursments as of March 31, 2001), to extinguish such indebtedness in full. The
warrant exercise price is $1.23 per share. In addition to the foregoing legal
expenses, through December 31, 2000, contingent legal expenses in the amount of
approximately $1.1 million have been incurred by the Company in contesting
claims in the Bankruptcy Court, which we will be obligated to pay only out of
savings realized from a successful reversal or reduction on appeal of awards
granted by the Bankruptcy Court with respect to contested claims, or, if an
appeal is not pursued, through cancellation of the unscheduled contingent legal
expenses by exercise of a warrant containing substantially the same terms as the
warrant described above.
OTHER CONTINGENCIES AND COMMITMENTS:
We continue to dispute the claims of National Datacast in our bankruptcy
proceeding. As of March 31, 2001, National Datacast's claim, including accrued
interest, totaled approximately $5.06 million. We appealed the July 2000
memorandum decision, and filed our opening brief on March 6, 2001. On November
13, 2000, we obtained from the Bankruptcy Court a stay of enforcement of the
judgment by National Datacast pending the appeal. The stay is conditioned on our
funding of the reserve account securing the claims of unpaid or disputed claims
created by our confirmed plan of reorganization at 100% of the remaining claims
and adjusting the reserve account on a monthly basis thereafter enough to cover
remaining claims in light of accruing interest, where applicable. We funded the
reserve account within the deadline set by the stay order, and have continued to
keep it funded at 100% through March 31, 2001.
We have settled the claims of the Equitable Life Assurance Society ("Equitable")
for a total of $840,000, one half of which was paid upon approval by the
Bankruptcy Court of the settlement, and one half of which is to be paid in equal
monthly installments over the twelve months thereafter, without interest. As of
March 31, 2001, we have paid the first half of the settlement and made eight (8)
of the monthly payments. The balance owed Equitable as of March 31, 2001, is
$140,063. There are four payments remaining, the money for which is set aside in
our reserve account.
Fish & Richardson claims it is owed approximately $267,000 (with interest) as of
March 31, 2001, for prepetition legal services rendered to Interactive. We
contend that we owe Fish & Richardson substantially less, if anything at all. We
recently filed an objection to Fish & Richardson's claim. At a status conference
on March 30, 2001, the Bankruptcy Court set trial on this dispute for September
4-5, 2001.
We are continuing our litigation against Networks North, Inc. (formerly NTN
Communications Canada, Inc.) in Canada for that company's alleged infringement
of our patents. To date, we have incurred expenses of approximately $103,000 in
connection with the pursuit of this claim. We currently expect to incur
aggregate additional expenses in excess of $60,000 in connection with the
pursuit of this claim.
On October 30, 2000, a judgment was entered on the complaint filed in our
bankruptcy case by David Lockton, a shareholder and our former CEO.
Subsequently, we paid Mr. Lockton the amount of his allowed claims plus interest
to the date of the payment, less $81,000 for the purchase price of the 900,000
shares of our common stock issued to him upon exercise of the options granted to
him under the judgment, and issued to him and registered the 900,000 shares. Mr.
Lockton retains the right to be paid $1.85 million under the terms of his
promissory note. Under the terms of the promissory note, payments do not become
due and payable until such time that the Company has generated certain levels of
certain positive cash flow for two consecutive fiscal quarters and any such
payments may be limited or suspended based on the extent of the Company's cash
flows.
RESULTS OF OPERATIONS
REVENUES. During the three month period ended March 31, 2001, we recognized
$67,500 in prorated revenue from minimum royalty fees owed based upon an
agreement with Two Way TV. In the three month period ended December 31, 2000, we
realized no revenue.
8
GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily
consist of salary, wages and related payroll expenses for executive and
administrative personnel, legal and accounting fees, other professional
services, business travel and other administrative expenses. General and
administrative expenses for the three month period ended March 31, 2001 were
$221,439 compared to $612,696 for the same period of 2000. This decrease for the
three months ended March 31, 2001 versus the comparable period in the prior year
was primarily due to a one-time charge of $390,000 recorded in the three months
ended March 31, 2000 for advisory fees related to additional claims filed with
the Bankruptcy Court.
OTHER INCOME AND EXPENSE:
INTEREST INCOME. Our interest income for the three month period ended March 31,
2001, was approximately $73,000, which consisted primarily of interest earned on
proceeds from the settlement with the Settling Parties. The decrease of
approximately $27,650 from the $100,653 for the three month period ended March
31, 2000, was due to the declining cash balance on proceeds from the settlement.
INTEREST EXPENSE. Our interest expense for the three month period ended March
31, 2001 was approximately $138,000, compared to approximately $106,000 for the
same period in 2000. Interest expense for 2001 and 2000 was related to interest
accrued to unsecured creditors as part of our bankruptcy reorganization. See
discussion under "Other Contingencies and Commitments."
NET LOSS FROM INVESTMENT IN AFFILIATE. For the three month period ended March
31, 2001, we recorded a net loss from investment in affiliate of $304,859,
compared to approximately $5,500 for the same period in 2000, accounted for by
the equity method. We also adjusted our allowance against this investment and
outstanding loans in the amount of $54,859 to write the investment, including
the loans, down to zero at March 31, 2001, as no assurance can be made that the
joint venture will be profitable in the future.
LITIGATION SETTLEMENT. No settlement was received in the three month period
ending March 31, 2001. During the same period in 2000 we received approximately
$219,000, which was primarily from debt forgiveness resulting from the
negotiated settlement with Windows to the World.
REORGANIZATION ITEMS. Reorganization items consist primarily of legal and
trustee fees directly related to our Chapter 11 bankruptcy reorganization,
entered into as a condition to the consummation of the Settlement Agreement and
the litigation and other expenses incurred in contesting claims in our
bankruptcy reorganization, which is still ongoing. We incurred no reorganization
expenses for the three month period ended March 31, 2001 compared to $106,272
for the comparable period in 2000.
FORWARD LOOKING STATEMENTS.
THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SECTIONS OF THIS QUARTERLY REPORT CONTAIN FORWARD-LOOKING STATEMENTS
THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES, FORECASTS AND PROJECTIONS
ABOUT THE COMPANY'S FUTURE PROSPECTS, PLANS AND STRATEGIES, MANAGEMENT'S BELIEFS
AND ASSUMPTIONS MADE BY MANAGEMENT. WORDS SUCH AS "EXPECTS," "ANTICIPATES,"
"INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," VARIATIONS ON SUCH WORDS
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND
INVOLVE CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS WHICH ARE DIFFICULT TO
PREDICT. THEREFORE, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS
DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS, INCLUDING CHANGES THAT COULD
AFFECT THE VALUE OF THE COMPANY'S INTELLECTUAL PROPERTY ASSETS AND DECISIONS BY
THE BANKRUPTCY COURT IN WHICH THE COMPANY'S CHAPTER 11 PROCEEDING WITH RESULTS
OF APPEAL WITH RESPECT TO ALLOWANCE OF CONTESTED CLAIMS WHICH MAY CAUSE A
RESULTING INCREASE IN POST-PETITION INTEREST ON CLAIMS AND COULD REDUCE THE
COMPANY'S ANTICIPATED WORKING CAPITAL. THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Date: December 5, 2001
INTERACTIVE NETWORK, INC.
(Registrant)
By: /S/ Bruce W. Bauer
--------------------------
Bruce W. Bauer
Chairman of the Board
President, Chief Executive Officer
and Chief Financial Officer (principal financial
officer)
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